Can you sit through a decade of losses? … why you’d fire “God” as your portfolio manager … the need to be deliberate about portfolio planning … the Early Warning Summit 2024 tomorrow night
Let’s begin with a fun thought exercise courtesy of our macro expert Eric Fry.
In his most recent issue of Investment Report, Eric laid out an investing scenario. As you read the details, ask yourself two questions:
- Would you keep this stock in your portfolio?
- If so, what do you think its ultimate return would be?
Here’s Eric:
If you had purchased Stock X 36 years ago (which is when the Bloomberg records on it began), you would have endured the following setbacks…
• 21% of the time, your stock would have produced an annual loss…
• 7% of the time, your stock would have produced a three-year loss…
• And on one occasion during those 30 years, your stock would have spent an entire decade producing a loss.
So, take a moment…
Would you keep this stock in your portfolio (an entire decade of losses!)? And if so, what would be its ballpark return (given the incomplete information that you have)?
Here’s the big reveal from Eric:
“Stock X” is Berkshire Hathaway (BRK-A), the investment vehicle that made Warren Buffett a multi-billionaire… and made millionaires out of many ordinary investors.
Berkshire produced its success over a multi-decade span that included numerous setbacks, or “slumps,” along the way…
Based on rolling 12-month calculations, BRK-A produced a negative annual return 21% of the time. But those uncomfortable one-year episodes would have seemed like a day at the beach compared to the nearly 11-year stretch from June 1998 to March 2009 when BRK-A produced a loss!
And yet, during the last 36 years, combined, Berkshire shares have delivered a staggeringly large return of more than 18,000%!
One more quick story and then we’ll get to our takeaway.
Back in 2016, the team at the quant shop Alpha Architect published a paper titled “Even God Would Get Fired as an Active Investor”
It was a fun piece in which the researchers assumed perfect foresight. Here’s the question posed at the top of the paper:
If God is omnipotent, could He create a long-term active investment strategy fund that was so good that He could never get fired?
Now, before we even get to the details, let’s jump straight to the conclusion…
The answer is striking: God would get fired.
When we dig into the numbers, we see why.
The researchers looked at market returns between 1/1/1927 and 12/31/2016. They assumed a 5-year “look ahead,” for all common stocks for the 500 largest NYSE/NASDAQ/AMEX firms. They would choose the best forward-looking stocks, knowing what they would return over five years, then rebalance every five years.
While “God” did compound returns at nearly 29% per year, even the best decile of 5-year performance included a portfolio drawdown of 75.94%! And during the worst decile of 5-year performance, this perfect foresight portfolio suffered compound annual losses of -15.32%!
From the paper:
Clearly, even a “perfect” long portfolio can bring a long-only investor a ton of pain.
As we near the end of the year, it’s a good opportunity to be deliberate about your portfolio strategy and investment goals in 2024
What do you want next year?
That might seem like a question with an easy answer, something like…
“I want my portfolio to climb 30%.”
Okay, but what if I made you a different offer…
Your portfolio would crash 50% next year, but then 5X your returns within four years?
This happened to Eric:
Back in 2002, I recommended buying shares of Valero Energy Corp. (VLO), the oil-refining giant that is also one of my current portfolio positions. That stock tumbled nearly 50% during the next five months.
But VLO would go on to post a 500% gain in less than four years – or 18 times more than what the S&P 500 delivered over the same timeframe!
Eric’s experience, as well as Buffett’s entire decade of losses, highlights a tension each of us must wrestle with as we construct our portfolios…
Are we buying stocks for the short game (strong returns within the next 12 months or so), or are we looking farther out and willing to sit through what could be stretches of underperformance because we strongly believe in a stock or a trend?
There’s no right answer.
There’s only the need to be deliberate about aligning our investment goals and expectations with our portfolio construction.
After all, a stock that might be a 20-bagger a decade from now could produce underwhelming returns next year. If you don’t have that decade-long timeframe in mind, you’ll likely sell the stock and miss those epic gains.
Part of answering this question wisely depends on having a better sense of what next year will be like
What sort of market environment is on the way? Which trends are likely to explode higher? And how high might they go? What sectors do you want to avoid? What trends do, in fact, have the potential to be decade-long winners?
On that last note, here’s a question that most investors are likely thinking about…
How do you play AI? Is that more of a short-term trade where you’ll be looking to take profits by this time next year? Or is it a buy-and-hold, forget-about-it play for the decade?
Tomorrow night at 7 PM Eastern, Eric, along with Louis Navellier and Luke Lango will be discussing many of these questions as they hold their Early Warning Summit 2024 event.
Each December, these three experts hold a round-table discussion, highlighting their top wealth-generating ideas for the upcoming year, as well as the biggest market influences that will drive portfolio performance.
To be clear, their focus is on how to blow out 2024 returns based on the unique influences and trends impacting next year’s market. We’re talking inflation, rate cuts, the presidential election, and global geopolitical conflict, among other 2024-specific factors.
But that doesn’t mean investors with a longer-term timeline won’t find the evening quite valuable.
I can assure you Luke will discuss artificial intelligence investing (which can influence your personal preferred timeline for playing AI).
And I expect Louis will give us his thoughts on the oil market, which can help investors with their timing strategy (West Texas Intermediate Crude fell into the $60s last week – when will those prices push back into the $80s or higher?).
And Eric will likely touch on the resurgence of U.S. manufacturing (which has decade-long outperformance written all over it).
Nevertheless, the focus of next Tuesday’s event is “2024” and how to squeeze the biggest returns out of it.
Three perspectives in one evening
One of the greatest benefits of this annual Early Warning Summit is seeing how each of these analysts views the markets, and where they overlap in their beliefs. It’s a bit like a checks-and-balances system since Eric, Louis, and Luke approach the market quite differently.
Louis is a classic “bottom up” investor. This means he focuses on outperforming stocks first (not broad markets) with the help of his computer models.
He has objective criteria programmed into highly advanced computer algorithms that signal what to buy, when to buy it, and when to sell to collect the profits.
After finding investment candidates, he evaluates their broader sector to make sure he still likes the overall opportunity.
Eric is a classic macro, or “top down” investor. He starts by analyzing entire sectors, countries, trends, or asset classes to find the most explosive ones.
After an opportunity is in his crosshairs, he digs deeper to find the specific investments best positioned to capitalize on that broad trend.
Luke is a “research heavy” analyst, incorporating technical analysis, fundamental analysis, macro factors, thematics, historical data… Frankly, Luke eats and breathes this stuff, so there’s little that he doesn’t review as part of his research process.
Given the different approaches, when these analysts agree on the attractiveness of one particular sector or trend, it’s unusual – and a strong vote in favor of bullishness. Tomorrow night, you’ll hear exactly what these experts agree on and why.
So, as we near 2024, take a moment – what do you want for your portfolio?
Perhaps it’s a mix – some strong returns next year, and some long-term portfolio anchoring as well.
In either case, having a better understanding of what’s on the way in 2024 will be valuable in helping you set your portfolio goals and expectations. This is what the Early Warning Summit 2024 is all about.
To join us for what is sure to be the biggest event of our year, just click here to reserve your seat.
Have a good evening,
Jeff Remsburg
